Is inventory an expense?

Inventory is an asset when purchased and only becomes an expense once it’s sold. The cost then moves to Cost of Goods Sold, matching expenses to the revenue they generate.

What is inventory in accounting?

Inventory is not considered an expense when it’s purchased. Rather, it’s a current asset on the balance sheet until the goods are sold or used. Inventory remains an asset because it has future economic value; only when it’s sold or consumed does it move from the balance sheet to the income statement as Cost of Goods Sold (COGS), becoming an expense that matches the revenue it helped generate.

How to categorize inventory

Record as a Current Asset on the balance sheet under “Inventory.”
When sold, transfer its cost to Cost of Goods Sold (COGS) on the income statement.
Adjust inventory levels at the end of each accounting period to reflect physical counts or system balances.
Use methods like FIFO, LIFO, or Weighted Average Cost to track inventory valuation consistently.
Keep separate accounts for inventory types (e.g., raw materials, work in progress, finished goods).

Examples of inventory

Products held for sale by a retailer or wholesaler.
Raw materials and components used in manufacturing.
Work-in-progress items awaiting completion.
Finished goods ready for shipment.
Packaging or resale supplies directly tied to sold goods.

Tax implications for inventory

Inventory purchases are not immediately deductible; they’re capitalized as assets.
The cost of inventory becomes deductible only when the goods are sold (recorded as COGS).
Businesses using accrual accounting must report beginning inventory, purchases, and ending inventory to calculate deductible COGS.
Small businesses under the IRS cash method may qualify to expense certain inventory costs immediately if treated as non-incidental materials and supplies.
Maintain accurate records of purchases, counts, and adjustments to substantiate COGS deductions.